Deregulation

Definition

Deregulation is the process of removing or reducing government rules, regulations, and restrictions on businesses and industries, with the goal of promoting competition and economic growth. It involves the dismantling or relaxation of policies and laws that previously governed certain sectors or activities.

5 Must Know Facts For Your Next Test

1. Deregulation aims to foster competition, innovation, and efficiency by removing barriers to entry and allowing market forces to determine prices and allocate resources.
2. The Great Deregulation Experiment in the 1970s and 1980s saw the U.S. government deregulate industries such as airlines, telecommunications, and banking.
3. Deregulation of the financial sector in the 1990s and 2000s is often cited as a contributing factor to the 2008 global financial crisis.
4. Balance of trade concerns can arise from deregulation, as it may lead to increased imports and a widening trade deficit if domestic industries cannot compete with foreign competitors.
5. Proponents of deregulation argue it reduces costs, increases consumer choice, and promotes economic growth, while critics argue it can lead to market failures, environmental degradation, and income inequality.

Review Questions

• Explain how the process of deregulation aims to promote competition and economic growth.
  • Deregulation seeks to remove government-imposed restrictions and barriers to entry in various industries, allowing market forces of supply and demand to determine prices, production, and the distribution of goods and services. By reducing regulations, deregulation aims to foster competition among businesses, which can lead to lower prices, greater innovation, and more efficient allocation of resources. This, in turn, is intended to spur economic growth and productivity.
• Describe the potential impact of deregulation on a country's balance of trade.
  • Deregulation can have implications for a country's balance of trade, as it may lead to increased imports and a widening trade deficit. When industries are deregulated, they may face greater competition from foreign competitors who can offer products or services at lower prices. This can make it more difficult for domestic industries to compete, potentially leading to a surge in imports and a deterioration of the trade balance. Policymakers must carefully consider the potential trade-offs between the benefits of deregulation and the potential negative impact on the balance of trade.
• Analyze the role of the 'Great Deregulation Experiment' in the 1970s and 1980s and its relationship to the 2008 global financial crisis.
  • The 'Great Deregulation Experiment' of the 1970s and 1980s, which saw the U.S. government deregulate industries such as airlines, telecommunications, and banking, is often cited as a contributing factor to the 2008 global financial crisis. By removing regulatory oversight and restrictions in the financial sector, deregulation allowed for the development of complex financial instruments and risky lending practices that ultimately led to the housing bubble and subsequent market collapse. The lack of regulation and increased competition in the financial industry created an environment that prioritized short-term profits over long-term stability, ultimately contributing to the systemic vulnerabilities that precipitated the 2008 crisis. This highlights the potential unintended consequences of deregulation and the importance of striking a balance between promoting competition and maintaining appropriate regulatory safeguards.

Related terms

Regulation: The act of controlling or supervising an industry or activity, usually by means of rules and restrictions imposed by a government authority.

Free Market:

An economic system with minimal government intervention, where prices, production, and the distribution of goods and services are determined by supply and demand rather than central planning or regulation.

Privatization:

The transfer of ownership or control of a public service or industry from the public sector to the private sector.